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Frequently Asked Mortgage Questions

We are frequently asked by our borrowers to explain certain terms that are used in the mortgage industry. We have provided answers to some of the most frequently asked questions below, even if they do not necessarily apply to RFG loan. We hope that this helps to explain some of the mystery language that lenders use!

What is Debt to Income Ratio?

This is the relationship of your fixed recurring debt (housing, credit card minimums, car payments, etc. divided by your income. What is an acceptable ratio will vary by lender and loan program, but should never be higher than 50%. The stronger the borrower’s overall financial strength and the size of the down payment given  may cause the lender to consider a higher than average ratio.

What are Cash Reserves?

Cash reserves are the funds that a borrower has after all loan expenses are paid. The amount of cash reserves that a lender looks for varies by lender and loan program, but larger reserves are always more desirable than smaller ones.

What Does ‘Loan to Value’ (LTV) mean?

This is the relationship of the amount of your loan to the value of the property you are purchasing. It is the value of the property divided by the loan amount. Most lenders will require a 65% – 80% LTV.  For rehab loans, lenders generally look for 65% LTV based on the after repaired value of the property.

What Do I Need to Bring to Closing?

Most closings will take place at a title office or attorney’s office. The closing agent will advise the borrower as to what needs to be brought, but generally, a driver’s license will be required of each borrower. The borrower will also be advised on what funds are needed to complete the transaction, and should be tendered by bank check or wire transfer.

What is a Fixed Rate Loan?

A loan which has a constant interest rate for the life of the loan.

What is a Variable Rate Loan?

A loan where the interest rate varies either at certain intervals or under certain conditions stated in the loan documents. Monthly payments are adjusted each time the rate changes.

What is an Interest Only Loan?

A loan where only payment of interest is due monthly, no principal is due, and therefore, the loan will not amortize over the life of the loan.

What is Title Insurance?

Title insurance protects the lender and the borrower (if an owner’s policy is purchased) from loss due to certain specific title defects on the insured property. In the event there is a defect in title, such as contested ownership, typos in the legal description, improper recording, etc., the title company is required under the title policy to resolve the issues.

What are Points?

Points are a one-time fee that the borrower pays to the lender at loan closing. One point is equal to one percent of the loan amount.

What is Prepaid Interest?

It is the interest that is due between the day you close your loan and the last day of the closing calendar month. The amount is generally added to your closing costs rather than making your first loan payment less than a month after closing.

What are Closing Costs?

Closing costs include items such as title insurance fees, document preparation fees, points, underwriting fees, processing fees, prepaid interest, etc. Some are due to the title company, some to the lender and some to third parties such as taxing authorities.

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